Yesterday’s military escalation in Eastern Ukraine has so far had only a limited further fall-out in global financial markets. Asian markets are relatively steady after the major US stock indices dropped into negative territory, with the S&P 500 closing in official “correction” territory for the first time in two years. That means it is 10% lower than its record closing high from early in January.

European bourses and US futures are in the green as the market adopts a kind of buy-the-rumour, sell-the-fact on Russia’s so-called “peacekeeping exercise”.

It’s obviously tough to predict what happens on the geopolitical front with the atmosphere highly fragile.

With the tiering of sanctions well-flagged, dip buying in some risky assets is taking place with the landscape more mixed for commodity markets. Ukraine tensions are exacerbating supply risks for the global markets with major uncertainty over Russian supplies in the coming months.

It seems that measures and sanctions by the West will likely strike a balance between hitting Russia hard, but not so hard as to trigger aggressive Russian countermeasures. There is a big difference between sanctions aimed at financial systems and those that target oil and gas suppliers.

Dollar relatively subdued

The greenback has traded uneventfully over the last few sessions with the benchmark DXY continuing to oscillate around the 50-day simple moving average near to 96.

The data calendar has been light this week but hots up with the core PCE inflation data out on Friday. Clearly, investors will still prefer the liquidity and energy independence of the world’s major reserve currency while nerves remain frayed.

Events in Ukraine have impacted on Fed rate hike expectations with markets knocking off around 10bps of monetary policy tightening this year. But these are expected to bounce back swiftly, with the well watched US 10-year Treasury yield moving back close to 2%.

Hawkish hike by the RBNZ

Amid all the geopolitical tensions, the RBNZ hiked rates as forecast by 25bps to 1%.

Importantly, it said the cash rate is expected to peak at a higher rate (3.25%) than assumed in its November statement (2.5%), which was higher than many analysts had estimated.

Rates are now forecast to rise to 2.5% over the next 12 months. The committee also affirmed it was willing to move in larger increments if required over the coming quarters. Governor Orr repeated this later, saying rates do need to rise significantly and cannot rule out 50bp hikes.

The kiwi liked what it saw from the RBNZ and has continued to build on its impressive outperformance over the last week, even though geopolitical issues would ordinarily slow upside in pro-growth currencies.

NZD/USD bottomed out at 0.6529 in late January and the kiwi has pushed above trendline resistance and the 50-day SMA around 0.6720/26 this week. Upside targets include 0.68 and the 100-day SMA at 0.6854. Support is the December low around 0.67 if external factors impact more heavily on risk sentiment.

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